Break even point — meaning and formula

The break even point is the level of activity or sales at which a company makes neither profit nor loss. At the break even point sales revenue exactly equals total costs. Thus, the sales volume at which operations break even is indicated by the break even point. Break even point can be expressed in terms of number of units sold or in terms of sales value.

We know that,sales — variable cost = fixed cost + profitSince at the break even point profit is equal to zero, it follows thatSales at break even point — variable cost = fixed costThus, at the break even point, contribution is just enough to provide for the fixed cost. Thus enough contribution is necessary to be earned to cover fixed costs before any profit can be earned. If the level of actual sales is above the break even point, the profit will be earned by the entity. on the other hand , if the actual sales are below the break even point , the loss will be incurred by the entity.The following formula, can be used to calculate break even point:Break even point in terms of units= fixed cost/contribution per unitBreak even point in terms of sales value=(fixed cost x sales)/contributionor = fixed cost/(P/V ratio)When the graphical presentation of the cost volume profit relationship is made, the break even point will be the point at which the total cost line and total sales line intersect each other.The